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As the lifeblood of businesses, money constantly flows in and out of businesses. Interest rates, expenditures, royalties, credit, and many other business activities cause money to either accumulate within the company or individual, or travel to other places. This is cash flow.
Positive and negative cash flow
Cash flow is read as either negative or positive. Positive cash flow is an indication that the value of the company’s assets are increasing, whereas negative cash flow indicates the opposite. Positive cash flow is likely to open up the business to expansion, provide more choice in future decisions, and increase the potential of the investment portfolio. Negative cash flow may lead to liquidation of assets in order to pay off debts, internal restructuring, and downsizing.
Types of cash flow
Beyond positive and negative, there are types of cash flow which indicate the directors of the flow of cash—in other words, what is instigating and shaping the cash flow in that particular area.
Operating cash flow
When money flows in and out directly due to goods production and sales, money is spent to enable the operations that allow this to happen. This is operating cash flow or cash flow from operations (CFO).
Financing cash flow
Cash flows from financing (CFF) demonstrate the money that flows through the entity and is used to fund the entity and its capital. Investors will look at a company’s financing cash flow to determine its financial strength at a given time.
Investors can develop a fairly clear picture of a company because financing cash flow includes the transactions that involve issuing debt, equity, and dividends. So, the company’s on-time payments and accumulation of debt are measured over a period of time, illustrating the stability of the cash flow.
Investing cash flow
Cash flow from investing (CFI) will indicate the money gained and lost from the various investments in which the entity is involved. These investments range from purchasing physical assets such as real estate or vehicles for business trips, to investments from venture capital or angel investors.
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- Cash flow is the money which flows in and out of businesses
- It can be classed as positive or negative, indicating the increase or decrease in cash flow at the time
- The different types of cash flow help to understand what is directing and influencing the cash flow in certain areas
- Operating cash flow demonstrates the cash flow lost and gained in the everyday operations of the business
- Financing cash flow is the money funding the company and its capital
- Investing cash flow is affected by the various investments the company is involved with and can offer a deceptive negative reading of the company’s cash flow state